IRS Told to Do More to Curb Identity Theft Fraud 'Epidemic'

Tax fraud by identity thieves is on the rise, and the Internal Revenue Service should respond by beefing up enforcement and do more to make victims whole, a House panel was told on Friday.

The House Oversight and Government Reform operations subcommittee hearing put acting IRS chief Danny Werfel on the hot seat -- not only because the government is losing millions to scammers, but also because of ongoing political tensions from the investigation of the scandal over inappropriate targeting of conservative groups.

Incidents of taxpayer identity theft this year rose to 1.9 million as of June 29, 2013, according to the Treasury Inspector General for Tax Administration, up from 1 million in fiscal 2011.

“The IRS complains of a lack of resources, but it has 21 units tackling the problem and it’s gotten worse, not better,” said subcommittee Chairman Rep. John Mica, R-Fla. “We’re lucky [bank robber] Willie Sutton is no longer around today or he would be scamming the IRS.”

Mica made a point of saying that the issue is neither a new problem nor a scandal, “and we’re not here to pick on the IRS,” he added. But the agency “has a number of problems, and unfortunately, this continues.”

Ranking member Rep. Gerry Connolly, D-Va., agreed that 1.9 million is “an epidemic that is profoundly unacceptable.” He described the case of an identity theft victim from Fairfax, Va., whose tax return was rejected because a thief had already filed and collected a refund in his name. It took two years for the IRS to resolve the mess, but the taxpayer continued to have problems refinancing a house because his credit report reflected tax delinquency. “If we can step up enforcement and deter identity theft, we can help taxpayers and our constituents,” Connolly said.

Michael McKenney, Treasury’s deputy inspector general for audit, said the IRS has made “some progress but significant improvement is still needed.” He cited 860,000 problematic tax returns from the 2013 filing season costing up to $4.2 billion, including 446 tax refunds totaling nearly $600,000 being sent to a single bank account. The agency needs more access to third-party documents for verification, McKenney said.

Werfel described an ongoing “comprehensive strategy” to thwart identity theft under way at the agency he joined nine weeks ago, saying the IRS was currently conducting 1,100 investigations that had produced 785 indictments through June. So far this year, he said, IRS had suspended or rejected more than 4.6 million suspicious tax returns, already surpassing last year’s total, with 565,000 cases closed. “New procedures and programs have been adjusted to make the process faster,” Werfel said. Recovery time for victims is down to less than 120 days, in part because of greater centralized effort and in part because of a partnership with private-sector banks and software vendors.

“We have 3,000 employees, more than double the number during last year’s filing season, on what is one of the biggest challenges facing the IRS,” Werfel said. "It is an evolving learning process, and the goal is to get ahead of the schemers. There is a lot of work to be done, but it is trending better.”

Obstacles to progress Werfel cited include “the sheer volume and complexity of the problem, the need for upgraded technology filters and authentification procedures, and the difficult budget environment.”

IRS’ budget has been cut by $1 billion since 2010, costing 8,000 positions, and it lost $618 million this year from the sequester, Werfel said. “This forces some very difficult performance tradeoffs," he said. "Without a budget increase, we will face difficult choices. If we incur additional budget cuts, we would no longer be able to sustain our current level of effort on identity theft without significantly weakening other programs.” Last month the House Appropriations Committee backed a 24 percent cut for the IRS.

National Taxpayer Advocate Nina Olson told the panel that while the IRS has beefed up protections against identify theft since she first flagged the issue in 2004, “They have not made comparable strides in providing assistance to victims. Despite some improvement in cycle times, they continue to be six months or longer, she said, noting that unresolved cases reported to her office rose by 61 percent from fiscal 2011 to fiscal 2012, and are trending upward this year.

“That’s a pretty good barometer of the IRS’ problems,” Olson added. She suggested a new centralized office and a single point of contact for victims as they deal with the tax agency.

The state of Georgia has had some success with an anti-identify theft program, according to Douglas MacGinnitie, the state revenue commissioner of Georgia who himself was a victim of identity theft. Georgia officials spent $2.6 million to scrub the tax return database to flag returns with irregularities, MacGinnitie testified. The selected 44,000 taxpayers were then asked to respond to a few brief online questions, which delayed processing of their returns by an average of one to five days. But the overall savings for the state in avoided fraudulent refunds totaled $23 million.